The Premium of Familiarity: Financial Interactions between Foreigners

• In Event: Emerging Scholars in Political Economy

Abstract

Laboratory evidence shows that subjects allocate more of their endowment to in-group members. But there is remarkably little understanding of how individuals act in the international financial market. Once they decide to invest in foreign stocks, how do investors choose between different investment options, and how does transacting with foreigners affect socioeconomic values and political preferences? In this study, I examine the effect of cultural identity characteristics on investors’ financial decision-making. Specifically, I am interested in understanding how cultural similarity and homogeneity shape people’s willingness to invest in foreign companies. I offer a cultural-based theory and test it empirically using an experimental design. Understanding how and to what extent cultural identity factors affect individuals’ financial decision-making is crucial for advancing the discipline on that matter. Discriminating against individuals or firms based on their cultural origin is a pressing public concern worldwide. First, it negatively affects social capital, the norms and values that facilitate coordination and cooperation for mutual benefit. Failure to cooperate for mutual benefit, within and between societies, decreases the benefits of investment in human capital and democratic values by causing the erosion of solidarity, integrity, and civic participation. Second, in-group favoritism is often unnoticeable to people when making a financial decision as they use “judgmental shortcuts” unconscionably when deciding with whom to interact financially. Hence, the proposed research aims to describe and explain this phenomenon and the importance of promoting mutual trust in global financial decision-making.

Author

• Gal Bitton, Harvard University